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We Love the Home Runs

Culturally, our society loves the big outlandish efforts. We love the Baseball sluggers who hit massive home runs that pull us out of our seats (though we forgive them when they far more often strike out in their attempts to “swing for the fences”). We celebrate the Football defensive players who can “sack the Quarterback” (even though; at best, it happens a couple of times a game out of more than 60 plays). And, at times, we apply the same respect and affection for our prognosticators who forecast outcomes that have “game-changing” results.

Our culture celebrates the home run or big action.

Our culture celebrates the home run or big action.

However, while our athletes provide us with entertainment, amusement, and a distraction from our daily lives and can be afforded the liberty to try for the “big play;” following the projections of the so-called pundits who are willing to pursue the contrarian point of view time and time again rarely leads to financial success. The reality is that it is far more common that they are “one-shot wonders” more than repeat champions.

A recent article on written by Vishesh Kumar (January 18, 2011), pointed out the fallacy in following the pundit who either guessed correctly or made a bold projection of the recession before it happened in 2007. He spotlighted three of the more prominent pundits, each of whom correctly identified the likelihood of a recession well before others recognized it (Meredith Whitney, Nouriel Roubini, and David Rosenberg).

A follow up on their success since then has shown very lackluster results. According to Kumar, Whitney has been right on only 37% of her decisions regarding the S&P 500 Financials Index. Furthermore, Whitney is calling for a meltdown of the municipal bond market now (a forecast few others agree with). Nouriel has made numerous guesses that have not come to pass (hedge fund meltdown, forecasting oil prices would remain at $$0 a barrel, only to see the price top $80 a barrel, and his prognostication that the S&P 500 would fall lower than 600 by the end of 2009. The actual close at the end of the year was 1,115. Lastly, Rosenberg continues to bang the drum for doom and gloom, even as others recognize the recovery and have become more optimistic.

While it is memorable when someone seems to have an inner sense of the future and provides a glimpse of the future, it often is no different than the carnival fortune tellers who occasionally make a projection that comes true days, weeks, or years after providing a “reading.” If one constantly swings for the home runs and is willing to accept a lot of strikeouts, it stands to reason that every now and again, the ball will clear the fence. However, the batting average or number of times that the player actually gets a base hit is usually much lower than the players who do not try to hit homeruns with every swing, but rather, attempt to get base hits based on the situation of the game, where the pitch is placed, and the player’s natural swinging motion.

David Zahn